Risk assessment

Activity supported by consumption

Despite a low-quality institutional and political environment, economic activity is expected to remain strong in 2019. Higher wages, strong remittances from expatriates (9% of GDP), and more visitors from neighbouring countries are set to increase revenues, boosting household consumption. Reported employment will likely increase as the informal sector shrinks and jobs are created across all sectors. Credit will continue to grow vigorously, with doubtful loans (9% of outstanding loans) declining further. Retail trade will benefit from this positive trajectory. Conversely, exports of ores, wood, metals, chemicals, and footwear could slow as their main markets cool. However, agri-food and electricity sales stand to benefit from trade liberalisation with the EU and Russia. Public investment in infrastructure and administration will depend on the IMF releasing additional financing under the ECF, and, in turn, on the EU (€315 million over 2018-2020) and the EBRD (€700 million over 2018-2020 in partnership with the private sector). Payment of these funds is conditional on progress in implementing the Reform Agenda adopted in 2015, but also on institutional and administrative performances. This money will boost construction by supporting continued construction of the Corridor Vc motorway, which will cross the country between the Croatian border in the north and the Adriatic, as well as in the energy sector. Private investment, both domestic and foreign, will remain modest as low labour costs fail to offset persistent institutional weaknesses and a mediocre business environment.

Public accounts are in adequate shape, but the current account deficit is high

Bosnia-Herzegovina is expected to continue loosening fiscal policy slightly, while maintaining a balanced budget in 2019. Revenues, a 40% share of which is attributable to VAT, represent 43% of GDP and are growing in line with activity. Salary expenditures are contained, although this is less true for the Serbian entity. This balance, along with moderate growth, will be sufficient to stabilise the share of the country’s modest public debt, which is mainly denominated in euros (86%) and the local currency, the mark, which is pegged to the euro. Foreign creditors, half of which are multilateral public bodies, hold 68% of this debt. The debt is divided roughly equally between the country's constituent Bosnian-Croat and Serb entities, but, taking into account the respective GDPs, the Serbian public debt is higher (60% of GDP). While the public accounts look to be in acceptable shape, the way that their management is fragmented between the central government and the two entities, the future cost of pension and health systems and poor governance at state-owned companies could cause nasty surprises going forward.

The current account deficit may widen further in 2019. However, the trade deficit is expected to fall below a quarter of GDP. Expatriate remittances and the services surplus (7% of GDP) related to tourism and transport will, as usual, partially offset the trade deficit. International financing and FDI (2% of GDP) will help to bring the balance of payments into equilibrium, while maintaining foreign exchange reserves at the comfortable level of seven months of imports. Despite the reduction in bank debt, external debt accounts for 53% of GDP, divided equally between public and private debtors.

Ethnic divisions and the coexistence of three governments

The 1995 Dayton Agreements divided Bosnia and Herzegovina into two distinct autonomous entities: the Bosnian (Muslim) and Croat-dominated federation of Bosnia-Herzegovina and the Serb Republic of Bosnia, plus the district of Brčko managed by the central government. The central government is led by a collective presidency representing the three “constituent peoples”, which rotates every eight months. The constitution assigns very few powers to the central government, which is responsible for foreign and monetary policy, customs duties, VAT, transport and defence. Even these powers are difficult to manage, since each ethnic component has a blocking minority in the central Parliament. Muslim Bosnians are trying to strengthen the role of the central government, while Croats, who want their own autonomous entity, and Serbs, who are tempted to join Serbia, hope to derail the legislative processes. The October 2018 presidential and parliamentary elections again played out along ethnic lines, putting nationalist parties in control of the assemblies. The only surprise came when Zeljko Komsic of the Democratic Front beat his rival Dragan Covic of the Croatian Nationalist Party (HDZ) to win the position reserved for Croats in the collective presidency. Lengthy negotiations are expected to be required to form government coalitions, which will slow down the adoption of reforms needed for the resumption of multilateral financing and the process of applying to join the EU. The country’s institutional complexity does not make it any easier to deal with judicial deficiencies, regulatory disparities, corruption, oppressiveness and low administrative efficiency.